Working with Data on House Prices
1. Introduction: Data Use
Why would you or anyone go to a lot of
trouble
and
expense
seeking
sophisticated data to indicate variations
in house prices? Why not merely look in
the windows of a few estate agencies?
Trends in house prices, drawn from
government
statistical
sources
or
elsewhere, are cited in the mass media
from time to time. It is often difficult to
make reliable sense of these figures,
especially as presented for sensational
effect,
however,
without
some
awareness of basic economic ideas.
These ideas can be taken into account
when interpreting and using the data.
Private organisations within the housing
sector may use data to help plan future
business or social strategies.
For
example, the Council of Mortgage
Lenders (CML), a trade body that
represents the interests of almost all
major UK providers of mortgage finance
for house purchase, provides data
services of this kind.
Governments and their officials demand
detailed figures of long term house price
directions (trends) and shorter term
price fluctuations (volatility). These
figures can inform decisions about
macroeconomic policy, especially in
those countries such as the UK where
housing
constitutes
a
significant
proportion of overall household wealth.
The data can also inform microeconomic
policy wherever housing is regarded as
among the higher priorities for economic
or social development.
For example, a statement on the UK
Department of Communities and Local
Government [DCLG] website1 at the
time of writing read: “[w]e want
everyone to have a decent home at a
price they can afford whether they own
or rent it”.
Fulfilment of the
Department’s stated aspiration will
1
require estimation of the cost or
affordability of housing, using data on
house prices alongside data on incomes.
HM Treasury and the Bank of England
compile and use house price data in a
different way, to identify the patterns in
these prices which might affect the
economy as a whole.
In all of these examples, the techniques
used
will
reflect
theoretical
considerations, such as how economists
think house prices and the other
elements of the economy interact with
each other.
2. Data Search and Selection
Sources
of
available
data
about
residential house prices in the UK
include
HM
Land
Registry2.
This
government agency receives details of
all residential housing transactions in
England and Wales, including details of
the transactions price. A monthly
average
house price
estimate
is
available, not only for England and
Wales as a whole but also for smaller
geographical areas such as counties and
cities. A monthly publication can be
downloaded from the Land Registry
website
to
facilitate
analysis
of
variations in the average price paid
when properties are bought and sold
across England and Wales.
Some individual organisations that
provide
mortgage
finance
publish
estimates of average house price using
information from households that apply
to the organisation for a mortgage
product. Notable examples in recent
times have been the Nationwide3
Building Society and HBOS4 (Halifax
Bank of Scotland) which have regularly
published house price data available for
downloading.
2
3
4
http://www.landregistry.gov.uk/
http://www.nationwide.co.uk/hpi/default.asp
http://www.hbosplc.com/economy/HousingResearch.asp
http://www.communities.gov.uk/housing/
1
Data available include historical series
for the UK as a whole, for its nations
(England, Scotland, Wales and Northern
Ireland) and for the individual English
regions. Technology now facilitates
collection by the CML of population data
from a vastly larger sample of mortgage
applications made in the country. This is
an improvement on having to work with
a limited sample, which is less likely to
reflect the market reliably.
The DCLG uses raw data on successful
housing market transactions to generate
and make various series. They are made
freely available in the section of the
DCLG website which is devoted to
housing research and statistics.5
There can be tension between the twin
demands for reliable and prompt data.
For
example,
individual
mortgage
lending organisations in the UK publish
timely
but
sometimes
mutually
contradictory house price data. The
contradictions arise largely because the
series published by each lender are
based on a limited (and different)
sample of observations. Users may often
choose the more reliable if less timely
DCLG series, compiled as they are from
its larger survey.
in an ideal form for your particular
purpose.
DCLG Table 515, a live table, provides a
simple annual average house price from
1969 for the standard statistical UK
regions, such as East Anglia and the
East Midlands. The Table presents data
for `all dwellings’ and by type of
dwelling: either ‘new’ or ‘other’. It also
provides data by type of buyer: either
‘first time buyer’ or others known as
‘former owner-occupier’.
In addition to price data, Table 515
includes other data collected during the
mortgage application process which are
organised in a similar way. These other
figures include average size of advances
(the mortgage granted) and average
income of those households granted
advances. For example, we can obtain
estimates of the average advance and
average income for first-time buyer
households in a brand new dwelling.
3. Data Transformation
Interpretation
and
A problem commonly encountered with
a source as extensive as the DCLG is to
identify the tables and the data sets you
need among the many available.
Generating average price figures
Many uses of house price data require
an estimate of an average house price
for a succession of years. As we will see,
the way the average figure is generated
from a particular set of observations
influences which interpretations of the
resulting figure are valid.
We should be guided by what we want
to achieve with data and by how we
propose to analyse them. For instance,
your purpose might be to identify and
interpret long run trends in house
prices, not merely their short run
volatility. If so, you would search for a
series of figures covering a long,
continuous period and you might need
to extract data from more than one
table. Indeed, the data you need to
collect will not always be conveniently
located in one place or at one source
and will not always be presented to you
We begin our analysis of the long run
trend in the average of UK house prices
by plotting the average price for ‘all
dwellings’ from 1969. Each observation
is in pounds Sterling (£). Chart 1 below
plots each observation. It shows a
tendency for the average house price in
the UK to rise over time. The way the
slope of the line in our chart varies
shows the varying rate at which the
average price has grown from year to
year. If this rate of change had been
constant, then our line would have a
constant slope.
5
http://www.communities.gov.uk/housing/housingresearch/
2
£240,000
£220,000
£200,000
£180,000
£160,000
£140,000
£120,000
£100,000
£80,000
£60,000
£40,000
£20,000
£0
1969
1974
1979
1984
1989
1994
1999
2004
Source: DCLG, Table 515
We can use the concept of compounding
to calculate an historical rate of change
of house prices (g) by taking the first
and last of our annual observations in
the data series.
To do so, we employ the formula
1
(1) g  V n  1
 A
where V is the most recent house price
observation chosen and A is the earliest
observation. The n represents the
number of years (observations) between
them. Substituting in for our average
house price numbers for 1969 and
2008, we estimate an annualised long
run rate of increase in the average UK
house price across the chosen span of
decades to be 0.10499 or 10.5% per
year.

(2) g   £227,765
£4,640 


1
39
 1  0.10499
Note that this single percentage
estimate results from at least three
distinct averaging processes. It is
derived from observations on many
individual dwellings and from data on
house prices at different times in any
year. The final percentage figure is then
calculated from data on house prices in
a succession of years but then
expressed as a rate per year.
Our long-run estimates indicate a rate of
change of house prices, annualised
across more than three decades. That is
not to say necessarily that prices
actually changed at this rate each year.
Indeed, visual inspection (‘eyeballing’)
of Chart 1 shows that the rate of change
of house prices has not been constant
across that period. It varied from year
to year around the long run average
rate. This is the same as saying that the
annual rate of house price inflation has
fluctuated: the rate of inflation is
somewhat volatile. The evidence is
plotted as a line chart below (Chart 2).
We should always be careful not to
confuse a price level (prices at one point
in time) with price inflation (a change
over time) and with changes over time
in the rate of price inflation.
Each observation in Chart 2 indicates an
annual percentage change in house
prices. The changing slope in Chart 1
indicated that annual rate of change of
house price varies from year to year. In
Chart 2, we have point estimates of
those rates of change.
Chart 2:
Annual rate of house price inflation, %
35
30
25
Annual % change
Chart 1: Simple Average House Price
20
15
10
5
0
-5
1970
1975
1980
1985
1990
1995
2000
2005
Source: DCLG, Table 515
Chart 2 indicates that, between 1970
and 2008, decreases in the average
annual house price were far more
unusual
than
increases.
By
our
measure, they fell in only 1982 and in
1992 during that extended period, even
then only slightly. By contrast, the
measure indicates inflation rates beyond
20% in 5 different years, exceeding
30% in 1972 and in 1973.
The inferences we have drawn so far
have been based on periodic estimates
of house price calculated by taking a
3
This could be a problem if data users
want an estimate of the average house
price across that entire stock. Note that,
if so, they implicitly assume that pricing
those dwellings which have not been
available on the market during the
period in question is clearly meaningful.
To overcome the potential risk of
misinterpretation, average house price
series are published by lenders and by
governments
with
statistical
adjustments to control for differences in
the mix of properties6. The DCLG
publishes a mix-adjusted house price
series which is available with monthly
frequency
(from
February
2002),
quarterly frequency (from the second
quarter of 1968) and annual frequency
(from 1969).
The DCLG reassesses the mix of
properties in the UK at the start of each
year, based on the transactions in
mortgaged properties over the previous
three years. It then uses the profile of
transactions obtained in this way, to
make any necessary adjustments to the
house price series it publishes for the
rest of the year. For this reason, one
can use these data to compare house
price levels within the same calendar
year but it is not strictly correct to use
6
For details of how the DCLG mix-adjust house price data
please visit
http://www.communities.gov.uk/housing/housingresearch/housingst
atistics/housingstatisticsby/housingmarket/notesdefinitions/
them to compare house price levels
between different calendar years.
To
facilitate
the
more
accurate
comparisons between years which some
data users will require, the DCLG
provides a mix-adjusted house price in
index form. The index is compiled by
applying the actual percentage changes
from period to period. At the time of
writing, it starts with a price level for
the first quarter of 2002, so represented
by the number 100.
Chart 3 shows the annual average mixadjusted house price index since 1969
alongside the simple average house
price value which is expressed in
currency terms. The mix adjusted index
is measured on the left hand (vertical)
axis while the simple average is
measure on the right hand axis.
Chart 3:
Mix-adjusted and simple average price
Mix-adjusted index, 2002Q1 = 100
Simple average, £
200
£250,000
180
160
£200,000
140
120
Index
simple average from data corresponding
to completed mortgage applications.
Therefore, we have not yet taken
account of whether the mix of properties
being purchased with a mortgage
reflects the composition of the entire
existing housing stock. The housing
sector anywhere includes a very
heterogeneous
mix
of
individual
dwellings, not least because each of
them is in a different location. Hence,
there is potential for the sample of
properties bought and sold in any one
year to be not fully representative of
that overall mix of stock.
£150,000
100
80
£100,000
60
40
£50,000
20
0
£0
1969
1974
1979
1984
1989
1994
1999
2004
Source: DCLG, Tables 515 and 593
By eyeballing Chart 3, we can readily
see that the mix-adjusted index
demonstrates
almost
the
same
characteristics as the simple average
house price. We still observe the general
tendency for the average UK house price
to rise over the period and with similar
volatility in the rate of rise from one
short run period to another.
We can again estimate a long run
annual rate of change of average house
price for the period between 1969 and
2008, using our compound growth rate
formula. This time we will substitute in
our index numbers, instead of figures in
sterling.
4

(3) g  177.3
3.8

1
39
 1  0.1036
Our estimate of the long run rate of
change of house prices, as derived from
the mix-adjusted house price figures, is
10.4% per year. This compares with
10.5% obtained from simple average
figures. This confirms the evidence from
eyeballing Chart 3 that there is very
little difference between the two
estimates of house price in the UK over
this extended period of time. It is
possible, of course, for the gap between
them to be wider for a different span of
years or in a different country.
Using the same two data series, we can
also compare estimates of the actual
percentage rate of inflation of house
prices from year to year. To do so, we
derive another two series; these are
shown in Chart 4. They are identified as
mix adjusted and non mix-adjusted
inflation rates respectively, the latter
reflecting its derivation from simple
average data.
Chart 4:
Annual rates of house price inflation, %
Mix-adjusted
above by compounding price level data
directly.
Generating estimates in real terms
The estimates considered so far have all
been in nominal terms, so they offer no
indication of how house prices fared
relative to the price of anything else. We
will now derive indications of rate of
change in the real-terms price of
dwellings. We do so by comparing house
prices with consumer prices (the latter
covering a much broader category of
goods and services).
The consumer expenditure deflator for
the UK is a broadly-based measure of
the average price level of consumer
goods and services. The deflator is
published by the Office of National
Statistics (ONS) over a usefully long
succession of years with the 4-letter
series code YBFS. It can be downloaded
from several ONS releases, including
Table 1.4 of the Blue Book.
Chart 5: Consumer expenditure deflator
120
Non mix-adjusted
100
40
Index, Year 2003 = 100
35
Annual % change
30
25
20
15
80
60
40
10
20
5
0
0
1969
-5
1970
1975
1980
1985
1990
1995
2000
1974
1979
1984
1989
1994
1999
2004
2005
Source: DCLG, Tables 515 and 593
A comparison of the patterns in the
house price inflation rates derived from
our two house price series reveals a
great deal of similarity. Another way of
comparing our annual house price
inflation estimates is to compute an
average (mean) for both series. We
obtain an estimate of the annual rate of
change of house price of 10.75% using
the mix-adjusted rates and 10.78%
using the non mix-adjusted rates. These
figures do diverge (though not greatly,
in this case) from the pair we obtained
Source: Blue Book, National Statistics, Table 1.4
The deflator is presented as an index.
Each datum in the series measures the
consumer price level in any year as a
percentage of its value in the base year.
For the example plotted in Chart 5
2003 is the chosen base year, so
consumer prices for that year are
represented by index number 100.
Eyeballing Chart 5 reveals that the
estimated price of consumer goods and
services is higher for every successive
year throughout the period.
5
We use the compounding formula again,
this time estimating the long run annual
rate of change of consumer prices.
1
39
(4) g  112.1183
 1  0.0634

10.1964

Our estimate indicates that, from 1969
to 2008, consumer prices increased at
an annualised rate of 6.3% per year,
comparable
with
the
(compound)
estimate above for the simple average
house price of 10.5% per year.
If we want to compare degrees of
volatility between house prices and
consumer prices, we can derive from
each data set a rate of change series.
Chart 6: Annual rates of inflation, %
House price inflation
Consumer price inflation
housing increased over the full span of
years covered.
Chart 6 also indicates, however, shorter
periods within the full span when house
price
inflation
was
exceeded
by
consumer price inflation. Economists
describe any such period as being one of
declining real-terms house prices, even
if nominal house price inflation remains
positive. Indeed, Chart 6 indicates only
two periods of negative annual rates of
nominal house price inflation. Both
periods
coincided
with
real-terms
declines
in
house
prices,
when
compared with consumer prices.
4. Review Questions
1.
35
30
Annual % change
25
2.
20
15
10
5
3.
0
-5
1970
1975
1980
1985
1990
1995
2000
2005
Source: Blue Book, National Statistics, Table 1.4 and
DCLG, Table 515
Each point in Chart 6 indicates an
annual rate of price inflation in one
year; therefore, the difference between
two points on the same line indicates a
change between two different periods in
the rate of inflation.
Comparing a point on one line (data
series) in Chart 6 with the point on the
other line, for the same year, indicates a
difference between house price inflation
and consumer price inflation.
It is correct to state that Chart 6
indicates a higher rate of increase in
house prices, averaged over many
houses and over the whole period, than
in consumer prices. It reflects our
estimate of the long run average annual
rate of inflation, which was higher for
house prices than for consumer prices.
In other words, the real-terms price of
4.
5.
6.
Why might reliable house price data
be a higher priority for private and
public organisations in the UK than
in some other countries?
‘Demands for prompt estimates of
house price inflation can clash with
demands for _____ estimates of
house price inflation.’ Fill in the
missing word.
List three reasons (or more) why
accurate figures published by an
organisation involved in financing
house
purchases
might
not
represent the average price of the
entire stock of dwellings?
Distinguish between:
(a) a decrease in average house
price and decrease in house
price inflation.
(b) an increasing house price
trend over time and house
price volatility over time.
(c) an annual rate of inflation and
an annualised rate of inflation.
Why can the average real house
price fall while the average nominal
house price rises?
What distinguishes macroeconomic
policy purposes for using house
price data from microeconomic
policy purposes for using them?
This Case Study was designed and authored by: Dean GARRATT
and Stephen HEASELL, of Nottingham Business School,
Nottingham Trent University with acknowledgment of funding
from The Economics Network of the UK Higher Education
Academy.
March 2009
6